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August 2010
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Interest Rates on Mortgage Loans Decline Again

Once again, mortgage rates fall again and continued their streak of record breaking interest rates. The fixed 30-year loan fell to 4.55 percent and the 15 year declined to 3.91 percent. The Mortgage Bankers Association posted their weekly application survey and it shows that some folks are taking advantage of record-low mortgage rates.

The mortgage data report underlined the fact that most of the activity is coming from refinancing rather than home buying. The MBA survey showed a 4.5 percent increase in the overall number of home mortgage applications, and a 5.7 percent increase in the number of people who applied to refinance. So that means that mortgage refinancing represented 82 percent of all loan applications. It was notable that bad credit home equity credit line applications declined nearly 5 percent and fixed home equity rate loan application volume dropped over 2%.

Mortgage Interest Rates Hit Record Lows

Mortgage Interest Rates Hit Record Lows

Freddie Mac announced the lowest mortgage interest rates since 1971, yet the demand for new home loans remained weak. US mortgage loans did inch up last week but even with record low mortgage rates new home-buyers were not impressed. Lending companies have been taken back by the lack of interest from loan applicants. Mortgage industry insiders insist that the unemployment and tighter home loan guidelines are driving away the growth of home-ownership. .

Home purchase and mortgage refinancing applications rose by less than 1% in the first week of August, even as 30-year mortgage interest rates fell to 4.57%, the lowest in 20 years of record keeping by the Mortgage Bankers Association.

Wall Street Pushing for Home Refinancing Boom

Mortgage rates for a 30-year fixed rate loan are now available at 4.375%, the lowest it has been since Freddie Mac began tracking mortgage interest rates in 1971. But A big reason has to do with the fact that falling housing prices have left many borrowers with little or no home equity, which is also known as being “underwater.” As a result, they can’t qualify for home refinancing. Others are deterred from refinancing by strict lending standards and the high fees that come with it. People continue to seek fixed mortgage refinance loans even if they have negative equity.

To get more mortgage refinancing approved, some respected economists and analysts at firms like Morgan Stanley and Goldman Sachs say the government should encourage a refinancing wave by adjusting lending policies at Fannie and Freddie. The mortgage lenders were taken over by the government two years ago. They own or guarantee about half of all U.S. mortgage loans, or nearly 31 million home loans worth more than $5 trillion. They buy home loans from lending companies, package them into bonds with a guarantee against default and sell them to investors.

The savings from a major mortgage reset could be significant. Allow someone with a $200,000 mortgage at 6% to refinance down to 4.5%, and suddenly there is $3,000 a year available to be plunged back into the economy. Add that up across millions of people, and you have what Morgan Stanley economist David Greenlaw calls a “slam dunk stimulus.” The government is already trying to help borrowers refinance, but its existing programs have failed. The Home Affordable Refinance-Program, or HARP, is directed a homeowners whose loans nearly or completely outsize the value of their homes. The government rolled out HARP in an effort to aid millions of loan refinances, but only a few hundred thousand have been done. The problem is that there are too many restrictions when trying to refinance under HARP. That’s why some people on Wall Street want the government to roll out a less restrictive program to get more mortgages resets done.

Regardless of the pressure coming from homeowners and some on Wall Street for the government to ease refinancing guidelines, Treasury Department spokesman Andrew Williams tells The Associated Press that “the administration is not considering a change in policy in this area.” The government sees where the pitfalls are. Taxpayers have already pumped $145 billion into Fannie and Freddie over this last two years, and widespread refinancing now could raise that burden. Fannie Mae and Freddie Mac would very likely see their earnings decline and write-downs on their home loan securities go up. In total, a giant mortgage reset could cost the home loan lenders $75 billion, according to research from investment firm Keefe, Bruyette & Woods. Let’s also consider that a refinancing boom could have unintended consequences. The reality is that the pace of home foreclosures might not slow. A lower interest rate still might not be attractive enough for borrowers with deeply underwater mortgages to stay in their homes. To some, it is not worth paying any money toward a depreciating asset, regardless of the interest rate.

New borrowers could also face higher mortgage rates. A large refinancing wave would depress the value of mortgage-backed securities, making them less attractive to investors such as pension funds and foreign governments. Weak demand for those securities could lead to higher mortgage rates because lenders could have a harder time selling off their loans to investors. A short-term home refinancing wave could help stabilize the housing market now, but it could also hurt home sales later. Homeowners who are able to lock in a once-in-a-lifetime interest rate could be deterred from moving in the future. Hitting the mortgage refinance button could put more money into homeowners’ pockets today, and would also give the economy a quick jolt. But the ultimate costs are too high.